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Fiduciary Liability Insurance Policy Information

Fiduciary Liability Insurance

Fiduciary Liability Insurance. Fiduciary liability insurance is designed to protect corporations against fiduciary liability claims that pertain to the mismanagement of the benefit plans they offer their employees. This policy provides coverage for legal fees that would be associated with error and breach of fiduciary duty claims.

The Employee Retirement Income Security Act (Pension Reform Act of 1974) has greatly increased the responsibilities of fiduciaries or trustees of employee benefit or retirement plans.

Many insurance carriers now offer insurance policies to protect both the plans and individuals acting as trustees or fiduciaries from lawsuits alleging "wrongful acts" (errors or omissions in the handling of investment funds, for example).

ISO offers a standardized form, but most coverage is provided on company-designed forms. The Pension Reform Act allows for such insurance; but if the premiums are paid out of the retirement plan's funds, then the policy must permit recourse by the insurer against any negligent fiduciary.

Most fiduciary liability insurance policies are written with a minimum deductible of $1,000.

Fiduciary liability insurance helps protect businesses against claims resulting from a breach in fiduciary duty - with rates as low as $47/mo. Get a fast quote and your certificate of insurance now.

Below are some answers to commonly asked Fiduciary Liability insurance questions:

What Is Fiduciary Liability Insurance?

Fiduciary liability insurance is a type of insurance coverage that protects individuals, organizations, or trustees from claims or lawsuits that may arise from alleged breaches of their fiduciary duties.

This type of insurance provides coverage for legal defense and settlement costs in the event of a lawsuit, which can be extremely costly and time-consuming. The coverage may also extend to compensation payments, damages, and other costs associated with settling a case.

This insurance is designed to protect individuals or organizations that serve in a fiduciary capacity, such as investment advisers, employee benefit plan administrators, and trustees of trusts.

How Much Does Fiduciary Liability Insurance Cost?

Fiduciary liability insurance costs vary widely and range from under $50 into the thousands per month - based on the type of business, location, industry, size, company financials and more.

What Is A Fiduciary?

A fiduciary can be defined as any person that is included in documents that outline employee benefit plans, as well as any individual who has discretionary authority to make decisions regarding the management and administration of the plan or the assets that the plan provides.

Examples of fiduciaries include:

  • Administrators of employee benefit plans
  • Benefit plan sponsors (typically employers)
  • Committees that invest in benefit plans
  • Directors and officers
  • Plan trustees

Fiduciaries are responsible for choosing advisors and investments, reducing expenses, and strictly adhering to the benefits plan. They are obligated to act only in the interest of the participants of employee benefits plans, as well as the beneficiaries of the plans - not in the interest of the company that offers the plans.

The Employee Retirement Income Security Act of 1974 (ERISA) established stringent fiduciary conduct standards. If a fiduciary breaches the obligations and responsibilities that are established by the ERISA, he or she may be held liable and may be legally required to personally compensate the benefit plan in question for any losses that may have occurred.

Should the Department of Labor (DOL) bring an action against a fiduciary, he or she may also face civil penalties.

Given the responsibilities that are associated with being a fiduciary, those who are tasked with this role face a great deal of liability and fiduciary litigation has been on the rise.

Being a fiduciary comes with a lot of responsibilities, and in order to protect oneself from potential liability claims, the right type of insurance coverage is vital. That's where fiduciary liability insurance comes in.

What Does Fiduciary Liability Insurance Cover?

Fiduciary Duty

As mentioned, fiduciary liability insurance is a form of coverage that is specifically designed to protect a business from any liability claims, such as errors or breach of fiduciary duty. This type of policy covers the costs that are associated with legal fees that a fiduciary may require to defend him- or herself against such claims.

Fiduciary liability insurance covers the company that holds the policy, as well as the employees of the company who are considered fiduciaries. This policy does not cover any third-parties, such as external advisors or administrators of employee benefit plans.

If a company uses external advisors, administrators, or consultants for their benefit plans, those individuals must secure their own fiduciary liability coverage. Furthermore, if a company does employ external resources to manage and administer the functions of their benefit plans, the company that holds the fiduciary liability policy is not excluded from any associated liabilities.

Breaches of fiduciary that are typically covered by a standard fiduciary liability insurance policy include:

  • Any mistakes that are made while administering plans; ineffective enrolment or terminations of plans that would result in the incorrect amount of or loss of benefits.
  • Automatic coverage for most newly created or acquired plans.
  • Conflicts of interest and prohibited transactions.
  • Counseling errors that are made when benefit plans are administered that result in the incorrect amount of or loss of benefits.
  • Coverage for challenges to settlor functions.
  • Errors or omissions in plan administration.
  • Failure to administer the plan according to plan documents.
  • Improper advice or counsel.
  • Imprudent investment of assets or lack of investment diversity.
  • Imprudent selection and failure to monitor third-party service providers.
  • Inappropriate changes in benefits.
  • Offering inappropriate employee retirement plan benefits, whether that advise is a mistake or on purpose.
  • Penalties and fees levied by the IRS or DOL under a voluntary settlement program.
  • Perilous investments in a pension plan.
  • Wrongful denial of benefits.
  • Wrongful denial or improper change in benefits.

These are some examples of the type of situations that a fiduciary liability insurance policy covers. Of course, the specifics regarding coverage depend on the specifics of the policy.

Who Needs Fiduciary Liability Insurance Coverage?

Not all business owners need to invest in a fiduciary liability insurance policy; for example, small business operations that do not offer benefits packages to their employees would not need this type of coverage. However, any business that offers any type of benefits to their employees will want to consider investing in this type of specialized coverage.

While a fiduciary liability insurance policy is not required by the ERISA or any statute set forth by the federal government, having this type of coverage in place is strongly recommended. Just like any other type of insurance coverage that is not required, it's always better to be safe than sorry; especially since the processes that are associated with employee benefit plans can be quite complex and confusing.

Even companies that are meticulous with the management and administration of their employee benefit plans can make mistakes, and those mistakes can result in legal issues and serious financial losses.

If you are a business owner or officer that offers any of the following benefit plans to your employees, you should seriously consider protecting yourself with a fiduciary liability insurance policy:

  • 401(k) or 403(b) retirement plans
  • Dental insurance
  • Medical/health insurance
  • Stock options
  • Vision insurance

Why Should A Business Buy Fiduciary Liability Insurance?

The primary reason why business owners should carry a fiduciary liability insurance policy is to protect themselves from any liability claims that may arise. The cost of legal defense fees and having to settle or losing to a plaintiff can be exorbitant.

These expenses can be so significantly in fact, that they can result in serious financial hardship that may potentially result in the loss of your business.

What Does Fiduciary Liability Insurance Cover & Pay For?

Fiduciary Liability Insurance Claim Form

1. Improper Investment Choices: A participant in a company's 401(k) plan could sue the plan fiduciaries, alleging that they failed to properly diversify investments, leading to substantial losses. Fiduciary liability insurance could help cover the cost of legal defense, settlements, and any potential judgements in such a case. It ensures that the fiduciaries are not personally liable for these costs, thus safeguarding their personal assets.

2. Failure to Monitor Investment Performance: If fiduciaries are not regularly reviewing the performance of the plan's investments, they could be sued by plan participants. Fiduciary liability insurance would cover the cost of legal defense and any settlement or judgement that arises as a result of such a claim. This could include the costs associated with any necessary expert witnesses or other litigation expenses.

3. Administrative Errors: Mistakes in administering a benefit plan, such as incorrectly calculating benefits, can lead to lawsuits. Fiduciary liability insurance provides coverage for the defense costs and potential settlements or judgements in such cases. This could include the cost to correct the administrative error and any associated legal fees.

4. Failure to Follow Plan Documents: If a plan's fiduciaries do not adhere to the plan's documents, they could be sued by the plan participants. Fiduciary liability insurance could cover the legal costs of defending against this claim, any settlements, and any judgements, helping to protect the personal assets of the fiduciaries.

5. Improper Advice or Counsel: If fiduciaries provide incorrect or inappropriate advice about plan benefits, participants could sue. Fiduciary liability insurance would cover legal defense costs and any settlements or judgements that result from this claim. This coverage could extend to include the costs associated with any necessary expert witnesses or other litigation expenses.

6. Selection of Inappropriate Service Providers: Fiduciaries can also be held liable for the failure of service providers they select, like an investment manager who performs poorly. Fiduciary liability insurance can provide coverage for defense costs and any potential settlements or judgements resulting from claims based on the selection of service providers. This could include the costs of litigating the matter and any potential damages awarded to the plaintiff.

Fiduciary Liability Insurance - The Bottom Line

The business world has become very litigious. If you are a business owner who offers benefit plans to your employees, investing in fiduciary liability insurance coverage is one of the the best ways to protect yourself from serious losses.

Additional Resources For Small Business Insurance

Protect your company and employees with the right commercial insurance policies. Read informative articles on small business insurance coverages - and how they can help shield your company from legal liabilities.

Small Business Commercial Insurance

Businesses need commercial insurance to protect their assets, employees, and customers. It helps to cover the costs of potential accidents, lawsuits, and other unforeseen events that can result in financial loss.

For example, if a customer slips and falls on a wet floor in a store, the business could be held liable for their injuries. Commercial insurance can help cover the costs of medical bills and legal fees associated with the incident.

Additionally, businesses often have valuable equipment and inventory that need to be protected from theft or damage. Commercial insurance can provide coverage for these items in the event of a disaster, such as a fire or natural disaster.

Furthermore, businesses often have employees that can be injured on the job. Workers compensation insurance can provide coverage for medical bills and lost wages for injured employees.

Overall, commercial insurance is a necessary tool for businesses to protect their assets, employees, and customers. Without it, businesses could face significant financial loss in the event of an unexpected occurrence.

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